Private banks embrace risk management

European wealth managers are increasingly making consistent use of a wider range of asset classes in order to pursue their clients’ main objective, which is wealth preservation. And it seems that, regardless of their different cultures and backgrounds, wealthy clients across the continent are all demanding the same approach from their advisors. In Germany, where investors come from a long tradition of investing in bonds and savings accounts, structured products and alternative investments have gained an important role in clients’ portfolios. The market boom of the late-1990s converted 10m Germans to become equity owners, eager to secure a share of the stock market bonanza. Just four or five years previously, there were fewer than 5m Germans investing in stocks and shares. “When people incurred heavy losses during the equity downturn at the beginning of the millennium, they said ‘never again’, which is a typical cyclical behaviour,” explained Jan-Christian Dreesen, chief executive officer at UBS Wealth Management Germany. Today German private investors are still more risk-adverse than UK and US counterparts, reckoned Mr Dreesen. But, while before the equity boom the same goal of preserving wealth was pursued through investing in government bonds, saving accounts and money market funds, today private clients look to different instruments to reduce risk. Structured products, such as certificates and discounts, have enjoyed a huge growth in the last three to four years in Germany in particular, and they have topped ?110bn in assets under management. But what is really changing is the attitude to alternative investments such as hedge funds and private equity, which have been traditionally wrongly perceived as more risky than individual stocks, said Mr Dreesen. However, the key challenge to explain to private clients that alternative investments add value to their portfolios, stabilise performance and volatility still remains, he said. “Clients still perceive alternative investments as volatile.” At UBS Wealth Management, in discretionary client portfolios, an average of 20 per cent of total assets are invested in alternative products. The percentage increases to 30-35 per cent in absolute discretionary mandates, where the target is to deliver absolute returns and not to beat a benchmark, which could result in losses, explained Mr Dreesen. Across the Channel, UK private banks, both large and small, also record a growing use by clients of a larger array of investment products and a better understanding of the role of these vehicles in their portfolios, as emerged at the PAM (private asset managers) annual award winners’ briefing. The UK private investor, who has always been traditionally equity centric, is now shifting towards a more “continental approach” to portfolio construction, wanting to add hedge funds, property and structured products to their traditional portfolios. “In my experience, Europeans have been more concerned with wealth preservation and more risk adverse than the UK investors, ” Neil Kennedy, director at UK firm Berry Asset Management, told the PAM briefing. “But products such as hedge funds and structured products have been bringing the UK more in line with that European feeling of taking risk out of the investment,” he said. Nick Tucker, head of UK and Ireland at Merrill Lynch Private Global Clients, believes that the wealth profile has changed dramatically over the last 30 years. Inherited wealth used to be the majority whereas now it is overwhelmingly the minority, he said. Most of people’s wealth now comes from taking risk in their own businesses, and investors are not willing to take risks in their more passive investments. Clients are more demanding and want to understand their investments. Advisory services assume therefore a more central role. “Clients want to be speaking to people who are implementing, not selling, they are significantly more demanding than the traditional wealthy people.” Wealth managers are driven to place an increased emphasis on risk management. Edwin Wilson, Chairman group of UK firm Stenham Advisers, specialised in hedge funds, believes that developing an in-depth research structure to manage risk is paramount in order to serve clients. The very wealthy clients, who say they are risk adverse, do not really understand the meaning of it, what they really understand is the concept of zero tolerance for capital loss, he said. Inflation indices do not measure inflation, certainly not the inflation that wealthy clients face, as they spend their money on art, wine, sporty cars or horses. This is the reason why Stenham is constructing portfolios delivering risk-adjusted return but with the new theme of inflation, meant as the “cost of living extremely well.” As explained by a popular saying, “the richer you are, the higher your inflation is,” said Mr Wilson. Private wealth managers are also recording a gradual trend towards high-net-worth clients’ need for income.

Dreesen: tough to convince clients that alternatives can bring stability